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IDA earnings call for the period ending December 31, 2018.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Welcome to IDACORP's Fourth Quarter and Year End 2018 Earnings Conference Call. Today's call is being recorded and webcast live. A complete replay will be available from the end of the day for a period of 12 months on the Company's website at idacorpinc.com. (Operator Instructions)

Now, I will turn the call over to Justin Forsberg, Director of Investor Relations. Please go ahead.

Justin S. Forsberg -- Director of Investor Relations

Thanks, Alison. Before the markets opened today, we issued and posted to IDACORP's website both our fourth quarter and year end 2018 earnings release and our Form 10-K. The slides we'll be using to supplement today's call are also available on our website. We'll refer to those slides during the call.

As noted on slide 2, our presentation today will include forward-looking statements, which represent our current views on what the future holds. These forward-looking statements are subject to risks and uncertainties, some of which are listed on slide 2, and are also laid out in more detail in our filings with the Securities and Exchange Commission, which you should review. These risks and uncertainties may cause actual results to differ materially from statements made today. We caution against placing undue reliance on any forward-looking statements.

As shown on slide 3, on today's call, we have Darrel Anderson, IDACORP's President and Chief Executive Officer; and Steve Keen, Senior Vice President, Chief Financial Officer and Treasurer. We also have other individuals available to help answer your -- any questions you may have after Darrel and Steve provide updates. On slide 4, we present our quarterly and full year financial results.

IDACORP's 2018 fourth quarter earnings per diluted share were $0.52, a decrease of $0.25 per share over the last year's fourth quarter. For the full year 2018, earnings per diluted share were $4.49, $0.28 higher than the same period in 2017. We have initiated our full year 2019 earnings guidance estimate in the range of $4.30 and $4.45 per diluted share, which is roughly 4.8% above our opening guidance in 2018.

Thanks, Justin. And welcome, everyone. Strong customer growth, a return to more normal irrigation sales, higher transmission wheeling and tax-related benefits, all contributed to our 11th consecutive year of earnings growth for IDACORP. Slide 5 shows this accomplishment, which is an unprecedented achievement for our Company.

I will now walk you through a reconciliation of income from 2017 to 2018 using slide 6. Customer growth of 2.3% added $10.3 million to operating income in 2018. Overall usage per customer, however, decreased operating income by $9.4 million. Residential usage per customer was lower by 6%, as there were fewer cooling degree and heating degree days in 2018 than 2017's very hot summer and cold winter. Next on the table, you will note an increase of $17.7 million in fixed cost adjustment revenues, related primarily to residential customers, which mostly offset the lower residential use.

In addition, the irrigation usage per customer was 9% higher, as a drier year returned irrigation customer sales to a more normal level. Lower customer rates resulted in a $26.9 million decrease in retail revenues per megawatt hour. The reductions consisted primarily of $22 million in tax reform savings, returned to customers as well as impacts from the differences in customer mix between the two years. An additional $4 million of non-cash amortization of regulatory deferrals further down the table also relates to tax reform.

Idaho customers begin to see benefits from tax reform through lower bills starting in June of 2018. These decreases are expected to benefit Idaho customers over the power cost adjustment cycle each year, which spans from June 1 through May 31st. Variations to these reductions are explained in our Form 10-K and we expect they will settle to approximately $26 million over each PCA cycle until the next general rate case. In addition to these changes in retail revenues, Idaho Power's operating income benefited from a $16.1 million increase, related to open access transmission tariff changes, or OATT changes, including rates and to a lesser extent wheeling volumes. Wheeling rates reset annually and decreased about 10% on October 1, 2018 to align with these variables.

Looking ahead, transmission activities could continue to be a positive for us, but we will watch cautiously as the OATT rate updates and changes develop with renewable energy in the market. Excluding the tax reform related $4 million non-cash expense amortization of regulatory deferrals, other operating and maintenance expense was $13.8 million higher in 2018 compared with the prior year. Higher maintenance service costs led to a $4.2 million increase in transmission and distribution asset maintenance expense and higher variable employee-related costs led to an $8.4 million increase in labor and benefit expenses.

We are not currently planning for the majority of the labor and benefit change to recur in 2019. So despite these increases, we are only expecting 2019 operating and maintenance expenses to be modestly above the relatively flat level of the previous six years. The result of all these items including rate reductions decreased operating income by $13.6 million prior to revenue sharing.

Finally, Idaho Power recorded $5 million as a provision against revenues to be refunded to customers through a rate reduction, expected to take effect in June of 2019. The sharing is based on full year 2018 return on year-end equity in the Idaho jurisdiction exceeding 10%. We've now been able to share more than $126 million with Idaho customers including an approximate $68 million reduction in customer pension obligations. Since the earning support and revenue sharing mechanism has been in place.

Idaho Power's operating income would have been higher than 2017, without the rate reductions to customers of $26 million and the $5 million of customer revenue sharing. Tax benefits from both the remeasurement of deferred income taxes, as well as, the make whole premium for an early bond redemption in 2018, added $9 million to earnings. The remeasurement of deferred income taxes, which relates to the change in income tax rates due to tax reform and their impact on the adjustment of temporary differences in the 2017 income tax return, decreased income tax by $7.7 million relative to 2017.

You may recall that we recorded a charge related to the remeasurements of roughly $2 million in 2017. In addition, Idaho Power recorded a $1.3 million flow through tax benefit related to a make-whole premium for an early bond redemption that occurred during the first half of last year. We do not expect these events to recur in 2019. The remaining income taxes were $23.9 million, lower largely related to lower statutory tax rates. As we indicated last quarter, IDACORP assumes both the risks and some of the benefits to the extent actual tax expense varies from the pro forma level agreed to in the settled tax reform regulatory proceedings.

Overall, Idaho Power's and IDACORP's net income were respectively $16 million and $14.4 million higher than last year. IDACORP and Idaho Power continue to maintain strong balance sheets, including investment grade credit ratings and sound liquidity. On slide 7, we show IDACORP's operating cash flows along with our liquidity positions as of the end of December, 2018. Cash flow from operations increased approximately $56 million when compared with 2017, mostly due to higher net income and the timing of working capital receipts and payments.

Going forward, we expect that the combination of a return to more normal changes in working capital balances and the timing of currently forecasted cash flows, related to regulatory mechanisms will return operating cash flows to a more normal level. The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the bottom of slide seven. At this time, we do not anticipate issuing any additional equity in 2019, other than the relatively nominal amounts under compensation plans.

Slide 8 shows our first look at earnings guidance and estimated key financial and operating metrics for the full year of 2019. We expect IDACORP's 2019 earnings to be in the range of $4.30 to $4.45 per diluted share. This guidance includes our expectation to use less than $5 million of additional ADITC in 2019. Remember that the full $45 million has been preserved and is available for future years under the Idaho mechanism.

We expect IDACORP's operating and maintenance expenses to be slightly lower than in 2018, with the range of $350 million to $360 million. We also forecast capital expenditures to be slightly higher in 2019, between $280 million and $290 million. Weather and reservoir storage condition so far, combined with the current forecast, suggest that hydroelectric generation should be in the range of $6.5 million to $8.5 million megawatt hours. As always, our guidance assumptions reflect normal weather conditions going forward.

With that, I'll turn the presentation over to Darrel.

Darrel T. Anderson -- President and Chief Executive Officer

Thanks, Steve. I want to add my thanks to all of you for being on today's call. I know you guys have a lot going on. I wanted to begin my remarks once again with a not to continued growth for Idaho Power. New customers are moving to our service area at a steady clip, which is driving higher sales and contributing to our increased loads. This trend combined with progress on several major initiatives and execution on our business strategy continues to benefit our Company, our customers and our shareholders, as we head into 2019.

On slide 9, you will see that customer growth remained strong and is up 2.3% over the past 12 months. This growth supports the assertion, the Boise coming in at number 4 for job growth on the Milken Institute's 2018 list of best performing cities. Boise moved up 14 places among cities on the list, since last year survey. According to Milken, low business costs and affordable cost of living, both of which have direct ties to fair price energy are the two biggest assets driving Boise's growth.

We also find that our clean, diverse energy portfolio is helping to attract new business customers. Nearly 50% of our energy comes from hydroelectric plants, which help makes Idaho Power's prices among the lowest in the nation, while reducing carbon emissions and providing a stable, reliable energy source for our customers. For the second year in a row, the United States Census Bureau published in December at the State of Idaho had the fastest growth rate in the nation. We believe most of that growth has occurred in Idaho Power service area. United Van Lines recently stated that Idaho had the third highest percentage of inbound moves in the country.

We have cited Moody's forecast in the past, and Moody's latest forecast states that gross domestic product in Idaho Power service area is predicted to grow 4.2% in 2019, and 2.2% in 2020. Employment within our region also remains on an upward trend. Compared with this time last year, employment within Idaho Power service area has grown 2.2%. Now nearly 525,000 people employed, a new record. Unemployment at the end of 2018 in Idaho Power service area was 2.9% compared to 3.9% nationally.

Sticking with the theme of growth and favorable business conditions, several notable large load projects came online during the fourth quarter in Idaho Power service area. These include McCain Foods, new potato processing operation in Burley; Fresca Mexican Foods' new state-of-the-art processing facility in Caldwell; and Idaho Central Credit Union's new datacenter in Pocatello. If you were to look at a map of the locations, that I just mentioned, you would see that our growth is not isolated to one particular geographic area, but instead is spread across our service area. There are several new projects that we expect to begin operations in 2019, as well and we continue to see interest from businesses, large and small. We are considering expanding within or moving to our service area.

I stated last quarter that we did not plan to file a general rate case in Idaho, Oregon in the next 12 months. That remains true today, as we look at the upcoming 12 months. Steady load growth combined with increases in our customer base, constructive regulatory outcomes and effective management of operating expenses, all play significant roles as we look at the need and timing of our next general rate case.

Turning to slide 10, in late 2018, we reached an important milestone on the Hells Canyon Complex relicensing, when the states of Idaho and Oregon agreed to a proposed settlement over reintroduction of steelhead and spring Chinook salmon into the Snake River above Oxbow dam. We expect this agreement will remove a significant obstacle toward achieving a new long term federal license for our three hydroelectric dams in Hells Canyon.

As part of the settlement, our Company committed to spend an additional $20 million total over the term of the license for research, water quality and stream improvements, key components of meeting our obligations under the federal Clean Water Act, while a significant achievement, several governmental approvals are still required and we do not expect to receive a new federal license from the Federal Energy Regulatory Commission before 2022.

Moving to a brief update on the Boardman to Hemingway transmission line project or B2H which continues to move forward, Idaho Power anticipates the in-service date for this line to be no earlier than 2026. But we expect the Oregon Department of Energy to issue a draft proposed order in the second quarter of this year, followed by geo-technical investigation in early 2020. While we still have a few months before the 2019 integrated resource plan is published, we continue to believe that the B2H project will prove to be a valuable resource to supporting cleaner energy future for the region.

Turning to weather on slide 11. Projections from the National Oceanic and Atmospheric Administration as of today, calls for equal chances above or below normal precipitation levels, and slightly above normal chance of warmer temperatures in the next three months. Given that we are seeing snow forecasted for most of the next week across our service area, I would say this is a story that continues to develop. With the recent precipitation in the form of rain and snow, reservoir storage in the Upper Snake, Boise and Payette systems recently move to above normal levels.

As a reminder, our power cost adjustment mechanisms in both Idaho and Oregon significantly reduce earnings volatility related to changes in our resource mix and associated power supply costs. I want to close with a shout out to the men and women who keep the lights on during what can be very trying weather conditions. There has been some crazy weather throughout the country and we here in Idaho and eastern Oregon have experienced some of these same conditions. Over the last month, we have seen significant snowfall and frigid temperatures across the service area that at times has challenged operations. Our people have been up for the challenge. I am proud to have the opportunity to work with such a dedicated group of people, who are committed to safely serving our customers regardless of conditions.

With that, Steve and I and others on the call will be happy to answer questions you may have.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we are ready to begin the question-and-answer session. (Operator Instructions) Our first question today will come from Julien Dumoulin-Smith of Bank of America. Please go ahead.

I just wanted to ask about rate cases. So, it's clear that you've done a very good job at keeping cost structures flat and you see a number of benefits through strong load growth in your commitment to managing operating costs and you have a constructive regulatory environment. Given that you mentioned, you're not going in for rate case in the next 12 months, what would actually drive you back for one? And is there a sense of when this could possibly be?

Darrel T. Anderson -- President and Chief Executive Officer

This is Darrel, I'll start a little bit on that and we've got Tim Tatum, who heads up our Regulatory Group is here also with us. But first of all, let me, we look at this all the time. This is something that we constantly assess and I said in my comments, we look at a number of factors. What's going on, with growth, number one and as I said, we've had strong growth over the last number of years which has been one of the key drivers right now is to why, we don't feel the need to go in and have to file. We've also done a really good job of managing our expenses. We're on our -- Steve talked about what are our expenses were for 2018. Now this the most, the biggest part of that increase is associated with some labor -- variable labor costs that we don't expect to reoccur in 2019.

And so if you look over the last seven years from an expense perspective, after adjusting for that, it's relatively flat. And so, and the other part of this is, as we continue to manage our capital program. Again, we spend what we need to spend on, and ensure there for a reliable and safe system and also in order to continue to meet our growth. So we look at all of those factors in totality and determine whether or not it makes sense to have to go in and file. And so as we said, we're not planning to do it for the next 12 months, but it's -- and so we will continue to assess that, we will update you all on that at the end of the first quarter depending on and take a look at the landscape there.

The other thing you have to, you can't lose sight of, too, though is the fact that, over the last couple of years, we've done some one-off regulatory filings where it had one off issues for instance in the Valmy settlement case. We did a one-off case there to address a specific issue and that has provided some recovery of cost and return in those cases. And so we sort of picked those one-off things where we can, and then we look at it holistically beyond that. So, I can't tell you right now. When that next one is going to be? But we will -- we would be inclined, when we have the next call, we would update what I just told you now. And the fact that we are doing it, we're not planning one for the next 12 months. And Tim, if you had anything to add.

Tim Tatum -- Vice President of Regulatory Affairs

Nothing more to add.

Darrel T. Anderson -- President and Chief Executive Officer

Okay. Hopefully. That's helpful at least from a high level perspective.

Alex Morgan -- Bank of America Merrill Lynch -- Analyst

Definitely. Thank you so much.

Darrel T. Anderson -- President and Chief Executive Officer

Thank you.

Operator

Our next question will come from Paul Ridzon of KeyBanc. Please go ahead.

There is -- really, there's two things that picked up there, is the prior year, I guess we had a rate increase, but it was only for the last few months that came in October. It was a pretty large, I don't remember the number on top of my head, about 30% -- about a 30% increase that, we weren't sure certainly at the start of the year, whether that would have an impact on volumes, but volumes stayed strong regardless, through the year. So that was a big lift. I do think that changing nature of the market where there's a lot more activity with renewables that is causing power to need to move from one place to another, lot has influenced that. And I think, I mentioned in my script, that we're watching that pretty close.

The rate is now dropping down again. It went down about 10% this October. As the old rates balance out, they take into account what just happened in the prior year and it rolls forward, but it is a bit of a guessing game on what volumes are going to do relative to the rates. And as you mentioned, we did just get an EIM, so we don't have a full year of EIM under our belt, either. So that's another place that I think a little more time will give us some clarity is that, and maybe do a better job of what we should predict in the coming years. But it was certainly a strong year. And there was a few bizarre activities, too, that drove occasional peaks that other not in our system so much. But if things go on, of course we will have to move power that could impact us.

Well, I think, I use the word cautious that -- yeah, I think we looked at it with pretty modest approach to it I would say around probably close. What we didn't do is take that and -- take the prior low year in this current higher year and run way higher. I think it's kind of as you hold. I think we looked at volumes, we pulled the price down. We may have expected a slight increase in volumes with a lower price, but we didn't do a lot with it, to be truthful.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

To the annual true-up kind of looks at last year's volumes and spreads out over more widgets or...

It's really a cost. I think I'm not the perfect one to explain this, but it's somewhat of a true-up of your cost against the amount of sales you consider happening related to the equipment doing that -- you give, maybe a better...

Tess R. Park -- Vice President of Power Supply

Looked at the cost of maintaining the transition system, what those costs are, and takes out a portion of it for the load and then the remaining portion goes into point to point rate. So as you get revenues back, they are credited back against that cost, so you have a really good year, one year, the following year, you may have lower rate because of those revenues from the previous year that get reduced of that the total cost.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Thank you. And any guidance on what to look for effective tax rate in '19.

Hey, can I just ask you. I was just looking the -- and I know you mentioned, this was a very good year on a cash flow perspective basis, but if I'm right, I was looking at the 10-K, you have a very huge cash balance now over like $260 million, $270 million. And if I'm right, if you do like a $125 million of dividends and $280 million of CapEx that gives you, operating cash flow, and it's of about $400 million, $500 million or 10 (ph). And I think so your normalized run rate is running around $420 million, $430 million. So it seems like you are in a very cash cow position and you have this extra cash lagging around. So can you just, can you just tell me what's the use of this cash. And why can't we get some kind of a special dividend or something like that?

Well, Ashar, If you, you can kind of look back a few years and what you'll see is we will tend to borrow in one year. And we will, it's typically aligned with the refinancing of some type, but we will pull out additional cash that we then have typically used to fund the next two years of construction and O&M. And so we did, we brought some in last year, we didn't use it all up by the end of the year.

I believe we're not more than a year away from that being gone just from the normal operations and there some more adjustments to the ins and out we referred to it in our liquidity discussion that for instance, the tax reform started in April. Some of the benefits started in January. So there's cash that's come in that is going to continue to be paid back over the PCA here. I believe it jumps actually the year following, and then settles back down to around the 26.

So the cash doesn't always line up with the earnings and that sort of thing and it does tend to true-up. So I guess as we sit and look at our cash balance, we don't see dollars there that we're not going to need for just basic operations. And I don't have all the -- let's view that layout right this minute, but we could probably walk you through that.

Ashar Khan -- Verition -- Analyst

Yeah. But can you give me, Steve, what is your normalized cash flow from operation. You mentioned this year its very high right this year you got $497 million. As I mentioned, your needs, your dividend and CapEx needs are $400 million. So you got $100 million of extra cash this year from your operations in 2018, so that is -- I've nothing to do. That's got nothing to do with borrowing or anything like that. That's just the business produced us huge amount of cash flow more than what it consumes this year, and so I am trying to understand how that gets used up and what is a normal run rate of CFO for a year? Can you elaborate on that?

But we did borrow roughly $100 million of additional cash this year, which as I said, is intended to fund the activities we have this year and in 2000 -- last year, and in 2019. So it's really a matter of -- you know in the old days we used to wait until we actually were -- we would even go into the negative on cash, and then we would finance, and 2008 and 2009 somewhat rang that out of all utilities, because from a rating agency perspective, you're respected a lot more if you keep short-term lines fairly undrawn and you finance ahead rather than in arrears, and that's really where we moved to and that has helped us...

Ashar Khan -- Verition -- Analyst

I understand that, but still -- that's why your cash balance went up prior not a $100 million -- by $200 million, are you with me, year-over-year, because you...

I guess for sure. We wouldn't drive our dividend policy on a one-year change. But I think if we get into the details, I wouldn't -- what you're seeing is not really what we're seeing, I mean it was a strong year. And I do think the timing of some of the PCA and the tax reform are playing into that. But they're not, we don't see the items that are there as permanent changes that would give us some found money that doesn't have to go anywhere. It's all lined up to be gone, and I think we're only a year or so away from seeing that come back and we'll have a new need to go out and borrow additional amounts.

Ashar Khan -- Verition -- Analyst

Okay. Okay. I'll follow up offline. Wanted to get a better sense of what an average CFO number is, for a year, I would appreciate any feedback on that. Thank you.

Well, it has been growing, I mean, that's our goal, it's not to keep it flat, it is to -- have to grow with the Company. It's just, this year was again mostly regulatory mechanism related that we accumulated little more cash and you're going to see that bring down a bit over the next year.

No, it was really, as Darrel mentioned, we had some costs that were higher that primarily related to payroll and benefits that we think are going to settle back down to a more kind of a levelized run rate, if you look at our number compared to last year, what we're projecting is really an uptick of about 1.4%. So we -- and I think that's consistent with what we said is that we don't know that we can hold completely flat into perpetuity. But we are aiming to be as close to flat as we can. So I think a modest rise in our O&M is what we're going to -- is what we are predicting for '19, and we'll be aiming for something like that on the go-forward to the extent we can.

Chris Ellinghaus -- Williams Capital -- Analyst

Okay. If I recall correctly, the IRP gets filed this year. When is that?

Darrel T. Anderson -- President and Chief Executive Officer

We -- Chris, this is Darrel, we would expect to file that in June.

Chris Ellinghaus -- Williams Capital -- Analyst

Okay. Darrel, you were talking about recent precipitation.

Darrel T. Anderson -- President and Chief Executive Officer

Yeah.

Chris Ellinghaus -- Williams Capital -- Analyst

So is the recent data leads you one direction or other in your hydro range at all?

Darrel T. Anderson -- President and Chief Executive Officer

So, we look long and hard on that range all the way up to yesterday, just kind of given how things were moving around on -- with the pre-chip side and with the forecast show. So the range that we gave you does give a pretty good indication of where we think, we could land. Again it is moving a fair amount, right now I mean, we're seeing, I mean, we went from below normal to above normal in the span of probably 10 days or so. So it was -- it's been a lot of precept and all over across our key to ranges (ph). So like I said to, this is -- this is something that is pretty good right now. And so, the range is pretty wide. But it's also -- sort of the same kind of range that we've had -- in the beginning of every year, because of some of the -- how much it can move.

Chris Ellinghaus -- Williams Capital -- Analyst

Okay. And can you -- can you give us a little color on the...

Darrel T. Anderson -- President and Chief Executive Officer

So, the other thing is -- let me just mention to you know, the other thing that is always hard and you know, this you've watched water a lot. Is it -- a lot of this, we can have a lot of snow, but a lot of it depends on when it comes off, and how it comes off, I mean if it heats up really quickly, that's not great for us. Necessarily, you have to flush lot of water that way versus if it's sort of a gradual warming trend.

So, as you saw in those charts from NOAA, as of today, they're projecting a slighter higher chance of potentially warmer than normal, but, so you don't really know for sure. So lot of it's timing on how that runs off. And again, obviously come end of first quarter, when we are having this call again we will likely have a little better perspective on how it sets up. But right now, the good news is, look at the mid-point of where that range is -- it's a pretty, it's a pretty healthy hydrogen number.

Chris Ellinghaus -- Williams Capital -- Analyst

Can you also talk a little bit about, you've mentioned some of the recent new customers that began operations, but can you talk about what's in the pipeline?

Darrel T. Anderson -- President and Chief Executive Officer

Actually we talked about that before the call and we kind of started this, we were not really in a good spot to talk about those right now. Sensitivity of customer info and all those sorts of things. So we're going to, we're not going to talk about it, but as they come online and if we get in a position where we are OK from the customers to share, we will.

Chris Ellinghaus -- Williams Capital -- Analyst

All right. I appreciate the detail.

Darrel T. Anderson -- President and Chief Executive Officer

Thanks, Chris.

Operator

(Operator Instructions) That concludes the question-and-answer session for today. Mr. Anderson, I will turn the conference back over to you.

Darrel T. Anderson -- President and Chief Executive Officer

Thanks, Alison, and thank you all for taking the time out to participate in our call this afternoon. We absolutely appreciate your continued interest in IDACORP. And as always, please feel free to call us with any further questions that you may have. And we hope that you have a great rest of the day. Thanks a lot.

Operator

That concludes today's conference, and thank you for your participation.

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